Mary Holm: Thinking beyond the obvious

Sometimes terrible events can offer fresh opportunities. Photo / Sarah Ivey

My parents' house in Christchurch is within the red zone. They are trying to work out how to proceed with their lives and I am hoping you can give some advice on their options.

Mum and Dad are in their late 60s and have no significant savings. They are living off their NZ Super. The value of their mortgage-free house and land in 2007 was $400,000 and they are due a quarter share of my grandmother's house (also in the red zone), which will come to a bit more than $100,000.

They are considering downsizing and moving to an outlying suburb of Christchurch, probably leaving them in much the same position financially as they are in now.

I am wondering if they may be better off renting and enjoying the money left over for the remainder of their lives.

Alternatively I am in the position to build a small house on my land in Bay of Plenty for less than the inheritance from my grandmother.

If Mum and Dad loaned me the $100,000 it would still leave them with $400,000 to enjoy, freeing them up to travel in comfort and have plenty of money to travel back to Christchurch to see family there. What's best for them?

It's funny how an unusual situation can get you thinking beyond the obvious.

When we look at your parents' first two options - remaining as homeowners or renting so they can "eat their house" - the same choice applies to many other retired couples with a mortgage-free home and little income beyond NZ Super. But usually selling their house doesn't occur to them. In your parents' case, though, they have to move - which presumably has prompted you to consider all alternatives.

However, I don't like the renting idea much, for one simple reason: security.

They don't know how long they will live, and if they rent they might run out of money. Worry about that possibility is likely to curb their spending on fun. It's one thing getting by on NZ Super if your accommodation is taken care of, quite another if it's not.

What's more, renters can't put down roots in the same way. They might be restricted in changes they can make to a house or garden, and they never know when the landlord might kick them out, or raise the rent unreasonably.

Of course there are pluses for renters. You can move quickly and easily, and you don't have to worry about maintenance and other responsibilities. But the pluses are unlikely to outweigh the minuses for retired people. The smaller house in the outlying suburb would probably work better.

Your parents, though, have another option - becoming your near neighbours. And if the house you build would be too small for their liking, presumably they could lend you $200,000 or $300,000 for a bigger place and still have some spending money.

The main factor here is that you are giving them free use of the land, releasing money that would otherwise go into land ownership. It's an appealing idea, assuming they are happy to move to your area.

One thing to consider, though, is that as they grow older, they probably won't have as many nearby friends and support people as they would in Christchurch. Does that sit well with them, you, and other family members?

Speaking of your kin, I suggest you talk the whole thing through with them, including what would happen when your parents die, or move to a rest home or elsewhere.

Would you sell their house and give back the proceeds - minus the value of the land - to your parents or their estate? How and when would the land be valued? And what if the house, minus land, sold for lots more than your parents had put into it? Would you keep all or part of that gain, or none of it? What if the opposite happened, and there was a loss?

There are several different "fair" ways to answer these questions.

I'm not trying to discourage you from what could be a really good outcome. But before your parents make plans to move north, I would recommend an honest family discussion and a written document, signed by everyone, that spells out what happens in different scenarios.

It might be wise to involve a lawyer. That might seem heavy-handed, but I've seen previously happy extended families split over lesser issues than this.

Finally, I want to commend you for thinking the way you do. Some people, with their eye on inheriting a portion of their parents' home, wouldn't entertain the idea of Mum and Dad blowing the lot. Good on you!

Just one word
How much or how little can be contributed to a child's account to get the $1000 government incentive?

Zero. (I always wanted to be able to do a one-word answer. Mind you, now that I've added this bit, I suppose I've spoilt it. And in any case, strictly speaking I should have said, "An infinite amount or zero.")

Too much caution
I would like to enrol my three granddaughters, aged between 1 and 5, in KiwiSaver so that they can receive the $1000 start-up from the Government, perhaps a few hundred dollars start-up from me and an annual contribution of $50-plus from me to cover the minimum fees.

My sons have doubts about the wisdom of locking the girls into a scheme for 60-plus years when eventually they might not want to contribute compulsorily, and concerns about the long-term future of the KiwiSaver scheme.

I think your sons are being overly cautious. It's true that once the girls start working, even if it's when they are young teenagers, 3 per cent of their pay will go into KiwiSaver. But if they don't want that to happen - then or at any later stage - they can easily take a contributions holiday. And they can renew the holiday every five years until retirement.

Those rules could change, of course. But I can't imagine a government stopping contributions holidays, because that would put off new enrollees. The exception would be if a government makes KiwiSaver compulsory. But if that happens, the girls would be put into the scheme anyway.

As for the long-term future of the scheme, I wonder what your sons have in mind. Sure, KiwiSaver balances will be affected by market conditions, but history suggests they will grow over time. And, with the scheme's huge popularity, no government is likely to take steps that would make members wish they hadn't joined.

Lucky grandkids
I have been thinking of opening KiwiSaver accounts for my grandchildren and putting in say $1000 each and getting government contributions for the same amount.

Do they get a tax break on the income earned?

What is it, and can you guesstimate the likely value of the investment in 20, 30 and 65 years time?

I also understand they could access the non-government contributions for housing but nothing else until 65. Is that correct please?

Another set of lucky grandkids!

There's no tax break in KiwiSaver, but there is a misleadingly titled tax credit - which has nothing to do with tax - that starts from age 18. You get 50c for every dollar you contribute, up to $521 a year on contributions of $1043. Also, if you are employed, your employer contributes 2 per cent of your pay, rising to 3 per cent from April 2013.

The value of the grandchildren's accounts over the years will vary hugely, depending on how much they earn and contribute and how the money is invested. But under the present scheme it won't be unusual for those who join as little ones to retire with more than $1 million, in some cases much more. Even after adjusting for inflation, that should still make for a jolly retirement.

On access to the money, the housing withdrawal is only for the purchase of a first home. The grandkids might also get a first home subsidy of $3000 to $5000. Withdrawals are also permitted if they suffer serious financial hardship or illness, or in some situations if they go overseas.

Retirement withdrawals start at the age NZ Super starts. That's 65, but is likely to be older by the time your grandchildren get there.

One other point for you and the previous correspondent. If you are under 65 and haven't joined KiwiSaver yourself, it's better to do that than to sign up the grandkids. You don't have to wait to turn 18 before getting the tax credit, so your account would grow faster than theirs. And you can always put the money in the grandchildren's KiwiSaver accounts once you reach NZ Super age.

Paying for performance
You asked in last Saturday's column whether there are advisory firms that operate on a "pay for performance" basis.

I thought you might be interested to know that Milford Asset Management does operate on this basis, and it is item seven of our seven "Investor Rights" that we have on our website (www.milfordasset.com), which reads "The right to fair and reasonable fees with a 'pay for performance' philosophy."

We are not keen on investment managers or advisers who "clip the ticket" even if the performance of a fund is poor. That is why we set a reasonable capped annual fee that includes all the normal operating costs associated with a Milford PIE or KiwiSaver fund and then have a performance fee if we out-perform.

We want to have a firm that operates on the basis that if our clients do well then we do well.

You are doing a modified version of what we were discussing last week, in that you charge a base fee regardless of performance. That smoothes out your income considerably. But still, our reader who couldn't find anyone willing to operate on a performance fee basis may want to contact you.

I should note, though, that your firm is not a one-stop-shop for all investment advice.

According to a disclosure statement from one of your authorised financial advisers, "Milford does not give specific advice on some of the wider issues you may need to consider such as estate planning, taxation and insurance planning."

Furthermore, the statement says: "I typically recommend the purchase of any investment on the Milford investment list (which will change over time) or investment in a Milford Unit Trust PIE fund ... For investments outside Australasia I recommend investment managers other than Milford Funds Limited."

Anyone who wants their adviser to consider a wider range of investment options may want to go elsewhere.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.